WEALTH HEALTH: Mistaken lessons from the financial crisis

For some investors, the upcoming fifth anniversary of the financial crisis of 2008 is also the five-year commemoration of the last time they were fully invested in the stock market.

By Chuck Jaffe

The Patriot Ledger, Quincy, MA

By Chuck Jaffe

Posted Sep. 15, 2013 at 12:01 AM
Updated Sep 15, 2013 at 3:11 PM

By Chuck Jaffe

Posted Sep. 15, 2013 at 12:01 AM
Updated Sep 15, 2013 at 3:11 PM

» Social News

For some investors, the upcoming fifth anniversary of the financial crisis of 2008 is also the five-year commemoration of the last time they were fully invested in the stock market.

The Standard & Poor’s 500 Index lost 37% in ’08, and while it has averaged an 8.3% per annum gain ever since – roughly enough to recover from that loss – scared and scarred investors have had a litany of reasons to avoid investing, and have been so busy focusing on those issues that they forgot the reasons to participate in the stock market.

They didn’t invest in 2009 because the sting from ’08 was so fresh and they saw no quick turnaround. In 2010, the fallout from the financial crisis was creating a debt emergency in the EuroZone, while 2011 saw concerns that the Federal Reserve was inflating a bond bubble at a time when world markets were suffering.

In 2012, investors worried about problems that had surfaced in China’s market and the looming fiscal cliff in America. This year, it was “Look at how much the market ran without me; you know a correction is coming, and it will happen the minute I am back in.”

In fact, over my desk there’s an 80-year stock-market timeline that shows one historic event after the next and virtually every one of those noteworthy points could have been used as a reason not to invest at the time. None of them did more than slow what looks like an inevitable climb toward the new heights the market has reached this year.

Terrified investors won’t get comfortable with the market overnight, even after a run to record-high levels; jumping in with both feet now would create a lot of stress.

But being so focused on the potential for the next crisis makes it hard to see what makes the most sense long-term for an overall investment program.

It’s important to look for reasons to invest rather than for excuses to stay on the sideline.

“Whether one likes stocks or not, we all have to take care of ourselves for our future. Avoiding getting better at it is not a solution,” said Donald MacGregor of MacGregor-Bates Inc., a Eugene, Ore., firm that researches judgment and decision-making. “Developing and applying discipline is part of the solution. We can't avoid markets.”

MacGregor noted that many people who have underinvested in equities or avoided the market altogether are “probably harboring thoughts that their home will be their future,” specifically that they can downsize and pocket the profits to get something that the securities markets haven’t delivered.

What they’re missing is that it’s still about markets, and the housing market in recent years has disappointed investors with the same kind of frequency as the stock market. The same can be said for markets in gold coins, collectibles, hard assets and virtually anything, because all markets have cycles that, with unfortunate timing, can lead to disappointments.

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“The discipline that is required is cold cognition and careful reasoning,” MacGregor said. “Doing nothing is simply running a risk, rather than consciously taking risks based on due diligence and good quality judgment.”

Christine Fahlund, senior financial planner for T. Rowe Price noted that instead of looking at the detriments of market downturns, long-term investors should be thinking about their benefits, especially when it comes to monthly contributions to retirement plans, which buy more shares when the market is down, promising greater returns so long as the long-term direction of the market is up.

Of course, that is easily forgotten in the middle or the aftermath of a crisis.

That’s why the fifth anniversary of the 2008 meltdown is a difficult point for investors who are stuck in the past, because it will serve to remind them of the trouble they lived through rather than focusing on what has happened since.

While the population of scared investors has dwindled as the bull market has gone on, plenty of people have overcome their fears only to a point of dipping a toe back in to test the water temperature; five years later, the anniversary will remind them of why they won’t believe experts who say “Come on in, the water’s fine.”

Instead of looking back at the financial crisis, investors should be looking to move on from it; despite all of the reasons for worry and the lingering concerns, record highs show that the market has.